2018 was not kind to investors in the Thrift Savings Plan (TSP) stock funds. The C and S Funds sharply declined in the fourth quarter and were down for the year. International stocks posted even lower returns than U.S. stocks.
Volatility was significantly higher than in 2017.
Often cited reasons for the declines include:
Slowing economies in China and other countries
interest rate increases by The Federal Reserve
Political volatility in the United States, Europe and the Middle East
Increasing worldwide debt
Lowered estimates for future earnings increases and growth in the U.S economy
Poor performance by Apple, Facebook and other market leaders.
Because so much is not known about the actual effects of these (and other) issues, it is important to stay focused on what we do know. Historically, stocks significantly outperformed bonds over long periods of time. That is illustrated in the table above and the graph below.
Many TSP participants react to stock market declines and volatility by overinvesting in the bond Funds and underinvesting in the stock Funds. They ignore historical trends indicating that stocks in well-diversified and well-managed portfolios outperformed bonds over longer time periods by high enough margins to justify the additional risks of market declines and financial risks.
Volatility and declining markets are unnerving and stressful. But successful investing is a marathon, not a sprint. Even intense volatility and declines like those in the fourth quarter should not alter your long-term financial plan. That plan should include an allocation target (desired percentages in stock funds and bond funds) based on your financial position, risk tolerance and investment timeline. Maintain a clear focus on longer-term goals, remain patient and stick to your plan.
The usual warnings apply: Past performance is no guarantee of future performance; investments involve the risk of loss of principal and earnings; “Average annual returns” even out variations in the actual year-to-year returns; stocks and bond investments fluctuate in value and there will always be times when they lose value; and the S&P 500 Index is still overdue for a “Bear Market,” a 20% or greater decline.